Why venture capital should be optimistic for 2023
After a two-year period in which a staggering $1 trillion was invested by VCs globally, it was only natural that investment would eventually return to a “normal” level
According to Crunchbase, North American start-up funding fell 63 per cent in Q4 2022 compared to a year earlier. Fears of a global recession are very real, and the phrase “crypto winter” has been used so much by pundits that it’s almost reached the point of semantic satiation. From a layperson’s perspective, investing in technology is not a good idea in Q1 2023.
And yet, a closer look at the figure from which funding fell in 2021 tells a different story. 2021 was easily the biggest year ever for VC investing, with tens of thousands of deals and billions of dollars invested from a firehose of money whose pressure was cranked up all the more by the Federal Reserve’s zero interest rate policies. That year’s total VC investment was nearly $640 billion globally, while 2022’s was a still impressive $415 billion. Over the past two years, in other words, some trillion dollars have been invested by venture capital.
Put simply, 2021 was an outlier. Q4 2022 might have been 63 per cent down on a year previous, but only in comparison to the highest quarterly total ever: $180 billion globally in Q4 2021. As pointed out by commentator Don Muir in Forbes this week, the 10 quarters from Q1 2018 to Q2 2020 saw an average quarterly figure of $67 billion, meaning that all-time high saw nearly three times as much activity as usual.
In the quarter just passed, Q4 2022, venture capitalists invested just under $66 billion – about a 2 per cent decrease in what Muir calls the “pre-bubble average”, and hardly something to worry about. Stories like the collapse of scandal-hit crypto trading platform FTX might be the stuff of broadsheet headlines or Reddit threads, but ultimately, venture capital is not collapsing dramatically: it is simply going back to normal.
Elsewhere, in an article in the Financial Times headlined “Is Big Tech flabby?”, analyst Robert Armstrong posed the question of whether job losses in tech were likewise indicative of a downturn. Yes, he said – but again, only in the context of the unusual hiring boom of 2021, as demand for software and hardware alike shot up as hundreds of millions of workers found themselves setting up offices at home during the pandemic. This week, Google announced they were cutting 12,000 jobs, joining Microsoft (who are cutting 10,000), Salesforce (8,000), Spotify (600) and, of course, Elon Musk’s Twitter, where downsizing is expected to take the company from 8,000 employees globally, to 2,000. Yet, says Armstrong, “the job cut announcements are best understood as signalling seriousness about costs to restive investors. In and of themselves, they are minor tactical adjustments at best.
“A 10,000 job cut is large,” he continues, “and huge for each of those 10,000 people – but remember that these companies that have been adding that many workers or more every year for years. This is not necessarily a meaningful change to business as usual.”
And there’s a final reason for optimism, too. Axios reports that, per Pitchbook, venture capital firms globally were sitting on “about $298.5 billion of dry powder”, as of September 2022, while US private equity is sitting on a cool $1.1 trillion. That money achieves little sitting in the bank. Meanwhile, lower tech valuations make the secondary market more attractive, and the wider economy is doing better than predicted; inflation is coming down, basis point by basis point. Venture capital isn’t going anywhere – 2023 will be, in the literal sense of the phrase, business as usual.